US faces market backlash as Fed's independence is threatened

Editor's note: Xue Tianhang is an associate researcher at the Institute for National Strategy and Regional Development, Zhejiang University. The article reflects the author's opinions and not necessarily the views of CGTN.

The US Federal Reserve's two-day policy meeting concluded on Wednesday with the Federal Open Market Committee (FOMC) choosing to hold interest rates. Market consensus expects the Fed to press the pause button on interest rate cuts, keeping the benchmark policy rate at the current range of 3.50 percent to 3.75 percent. Since September 2025, the Fed has implemented three consecutive rate cuts, amounting to a cumulative reduction of 75 basis points.

The Fed's rate-cut decisions have been the outcome of intense internal and external contestation. A number of Fed officials, including Fed Chair Jerome Powell, opposed further rate cuts. However, the Trump administration has strongly advocated for a faster pace of monetary easing and has continuously exerted mounting pressure on the Fed and Chair Powell.

On January 13, following the release of US inflation data for December 2025, President Donald Trump made repeated calls for interest rate cuts within a single day. Subsequently, the Trump administration escalated its attacks on the incumbent Fed chair, launching a criminal investigation into Jerome Powell. Former Fed chairs including Alan Greenspan and Ben Bernanke, in a statement signed by 13 former senior officials, described the move as "unprecedented political interference".

For decades, the Fed's independence has been regarded as a cornerstone of financial stability in the US and globally, as well as a critical pillar underpinning the credibility of the US dollar. The original institutional design aimed to ensure that monetary policymakers could focus on long-term economic well-being, rather than short-term political considerations, in order to fulfill the Fed's dual mandate of price stability and full employment.

However, as pressure from the Trump administration has intensified, the Fed is facing one of the most severe governance crisis in decades, with significant implications for the credibility of the US dollar and the broader US economy. In the 1970s, the US was trapped in a period of stagflation. In an effort to secure re-election, then-President Richard Nixon pressured Fed Chair Arthur Burns to pursue aggressive monetary easing. Historical data suggest that in years such as 1971 and 1983, US M2 money supply grew at double-digit rates, often cited above 12 percent in retrospective analyses, sowing the seeds for persistently high inflation and unemployment throughout the decade.

International credit rating agency Fitch Ratings has noted that the "independence"of the Fed is a key factor underpinning the nation's AA+ sovereign credit rating. The Trump administration's heavy-handed intervention in the Fed has seriously undermined international investor confidence, with the "sell America" sentiment spreading across financial markets.

The repercussions of diminished US monetary policy independence extend well beyond short-term market turbulence. Over the longer term, erosion of the Fed's independence will significantly increase uncertainty surrounding US monetary policy, further weakening global investors' confidence in US dollar-denominated assets. Coupled with the country's increasingly severe debt challenges, rising risks to dollar credibility are likely to accelerate the global process of de-dollarization, leaving the US subject to sustained market backlash.